Lowe’s Companies, Inc. — Form 10-Q summary
Period clarification: The filing covers the fiscal quarter and nine months ended October 28, 2011. This does not match the request metadata’s “2010 Q3.” Financial amounts are in millions unless stated otherwise.
Business context and reporting period
Lowe’s operates home-improvement retail stores. Management described efforts to improve the core business, reorganize store operations and merchandising, invest in technology, and focus expansion on projects expected to generate shareholder value. Interim results may not indicate full-year results.
Financial performance and liquidity
| Metric | Three months ended Oct. 28, 2011 | Comparable 2010 period | Nine months ended Oct. 28, 2011 | Comparable 2010 period |
|---|---|---|---|---|
| Net sales | $11,852; +2.3% | $11,587 | $38,579; +0.6% | $38,335 |
| Comparable-store sales | +0.7% | +0.2% | -1.0% | +1.4% |
| Gross margin | $4,037; 34.06% | $4,061; 35.05% | $13,371; 34.66% | $13,426; 35.02% |
| Net earnings | $225 | $404 | $1,517 | $1,725 |
| Diluted EPS | $0.18 | $0.29 | $1.17 | $1.21 |
- Third-quarter operating margin (EBIT margin) was 3.74%, down 257 basis points; nine-month operating margin was 6.98%, down 89 basis points. SG&A rose to 27.27% of quarterly sales from 25.30%, substantially reflecting store-closure and discontinued-project charges.
- Nine-month operating cash flow was $3,892, compared with $3,833. Investing cash outflow was $983 versus $1,868; financing cash outflow was $2,886 versus $1,521, largely due to increased share repurchases.
- At October 28, cash and cash equivalents were $675 and short- and long-term investments totaled $999. Current assets were $10,423 and current liabilities $9,156. Total debt was approximately $6,615, including $590 of current maturities and $6,025 of long-term debt.
- The company had no borrowings or letters of credit under its $1.75 billion revolving facility and no commercial-paper borrowings at quarter-end. The amended facility extends to October 2016; the company reported covenant compliance.
- For the first nine months, share repurchases were $2,434 and dividends paid were $470. The board authorized a new $5.0 billion repurchase program in August; the full $5.0 billion authorization remained at quarter-end.
Material changes versus the prior comparable period
- Quarterly sales improved, supported by 1.9% growth in customer transactions and 0.4% growth in average ticket; comparable-store sales benefited from the 5% cardholder discount and Hurricane Irene-related demand. Sales on transactions over $500 declined 0.8%.
- Gross margin contracted 99 basis points in the quarter. Management cited cardholder discounts and commercial-program launch, inflation, clearance activity, the move toward everyday-low pricing, higher fuel costs, and inventory adjustments related to store closures.
- Management announced closure of 27 underperforming stores and discontinued a number of proposed store projects. Total related charges were $336 for the quarter and $401 for nine months. The quarter’s total included $232 of long-lived-asset impairments, $62 of exit costs, $30 of discontinued-project write-offs, and $12 of inventory adjustments.
- Nine-month repurchases increased to $2,434 from $1,616. The weighted-average diluted share count fell to 1,286 from 1,417, but lower earnings outweighed the share-count reduction.
Outlook, commentary, risks and unusual items
- As of November 14, 2011, management expected fourth-quarter sales growth of about 8%, including an estimated 7% contribution from the additional 14th week; comparable-store sales were expected to be flat to up 1%. Operating margin was expected to decline about 50 basis points and diluted EPS was forecast at $0.20–$0.23.
- Fiscal 2011 guidance was sales growth of 2%–3%, including the additional 53rd week; comparable-store sales decline of about 1%; operating-margin decline of 80–90 basis points; and diluted EPS of $1.37–$1.40. The EPS forecast included an estimated $0.20 impact from store-closure and discontinued-project charges. Capital expenditures were forecast at $1.9–$2.0 billion.
- Beginning in fiscal 2012, Lowe’s expected to open 10–15 North American stores annually, more than 50% below its prior expansion plan. Management also cited technology upgrades, mobile-device deployment, value improvement, and product differentiation as priorities.
- After quarter-end, Lowe’s issued $1.0 billion of unsecured notes: $500 million of 3.8% notes due 2021 and $500 million of 5.125% notes due 2041. Management said it planned to consider issuing up to approximately $3.0 billion of additional unsecured debt by fiscal year-end 2012, subject to business and market conditions.
- Key uncertainties include housing and consumer-demand conditions, competition, weather, costs and product availability, and estimates used in asset-impairment and store-lease obligations. A 10% reduction in estimated sublease cash inflows for the 11 leased stores closed in the first nine months would have increased lease-obligation expense by approximately $10 million.
- The company reported $150 of unrecognized tax benefits and said certain federal and state tax matters could be settled within 12 months, potentially reducing that balance. It reported no material changes to previously disclosed risk factors. The independent accountant performed a review, not an audit, and reported no material modifications needed to the interim statements.
Important facts for investors to verify
- Whether the fiscal 2011 guidance was achieved, particularly comparable-store sales, margins, EPS, and the effect of the extra week.
- The final cash and earnings impact of the 27 store closures and discontinued projects, including impairment and lease-cost assumptions.
- Whether sales and margin trends improved after temporary support from storm-related demand and cardholder promotions.
- Debt issuance, planned additional borrowing, capital spending, and repurchases relative to operating cash flow and liquidity needs.
- Resolution and financial effects of the disclosed tax examinations and unrecognized tax benefits.